Kanter v. Reed

Filed 6/2/23
CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

RHODA A. KANTER et al., B312129

Plaintiffs and Appellants, (Los Angeles County
Super. Ct. Nos. JCCP4861,
v. BC611319, BC617444,
BC664302,
DEBRA L. REED et al., 37-2-16-000058421)

Defendants and
Respondents.

APPEAL from a judgment of the Superior Court of Los
Angeles County, Daniel J. Buckley, Judge. Affirmed.
Westerman, Jeff S. Westerman and Guido E. Toscano for
Plaintiffs and Appellants.
Complex Appellate Litigation Group, Rex S. Heinke,
Jessica M. Weisel; Gardy & Notis and Jennifer Sarnelli for
Plaintiff and Appellant Rhoda A. Kanter.
Bottini & Bottini, Francis A. Bottini, Jr., Albert Y. Chang,
and Yury A. Kolesnikov for Plaintiff and Appellant Arlander
Favors.
 Robbins, George Aguilar and Brian Robbins for Plaintiff
and Appellant Nancy F. Lewis, as Trustee for the Nancy F. Lewis
Trust.
Bragar Eagel & Squire, W. Scott Holleman, Marion C.
Passmore, and Melissa Fortunato; Glancy Prongay & Murray,
Robert V. Prongay and Ex Kano S. Sams, II for Plaintiff and
Appellant Erste Asset Management GmbH.
Morgan, Lewis & Bockius, Thomas M. Peterson, Robert H.
O’Leary, and J. Warren Rissier for Defendant and Respondent
Sempra Energy.
O’Melveny & Myers, Matthew W. Close, Brittany Rogers,
and Kelly McDonnell for Defendants and Respondents Dennis V.
Arriola, Steven D. Davis, Joseph A. Householder, Jessie J.
Knight, Jr., J. Bret Lane, and Martha B. Wyrsch.
Skadden, Arps, Slate, Meagher, & Flom and Allen L.
Lanstra for Defendants and Respondents Alan L. Boeckmann,
James G. Brocksmith, Jr., Kathleen L. Brown, Pablo A. Ferrero,
William D. Jones, William G. Ouchi, Debra L. Reed, William C.
Rusnack, William P. Rutledge, Lynn Schenk, Jack T. Taylor, and
James C. Yardley.

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 I. INTRODUCTION

In this shareholders’ derivative action, plaintiffs1 appeal
from a dismissal entered after the trial court sustained a
demurrer on the grounds that plaintiffs failed to allege facts
sufficient to show that a presuit demand on the board of directors
(Board) of nominal defendant Sempra Energy (Sempra) was
excused by futility.2 We affirm.

1 Plaintiffs are Arlander Favors, Rhoda A. Kanter, Nancy F.
Lewis, as trustee for the Nancy F. Lewis Trust, and Erste Asset
Management GmbH.

2 As explained below, Corporations Code section 800,
subdivision (b)(2) requires a shareholder bringing a derivative
action to allege “with particularity” the “efforts [made] to secure
from the board such action as [the shareholder] desires, or the
reasons for not making such effort . . . .” Further statutory
references are to the Corporations Code unless otherwise
indicated.

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 II. BACKGROUND

A. Factual Background3

Plaintiffs were stockholders of Sempra when the Aliso
Canyon Natural Gas Storage facility (Aliso Canyon facility)
experienced a natural gas leak (Aliso gas leak).4 Sempra was a
California corporation “whose operating units invest[ed] in,
develop[ed], and operate[d] energy infrastructure, and provide[d]
gas and electricity services to [its] customers in North and South
America.” One of Sempra’s wholly-owned subsidiaries, Southern
California Gas Company (SoCalGas), maintained the Aliso
Canyon facility.
Defendants5 were either officers of Sempra or members of
the Board or officers or members of the board of directors of

3 “In this appeal following the sustaining of a demurrer, we
assume the truth of the properly pleaded factual allegations,
facts that reasonably can be inferred from those expressly
pleaded and matters of which judicial notice has been taken.”
(Fierro v. Landry’s Restaurant Inc. (2019) 32 Cal.App.5th 276,
281.)

4 See generally Southern California Gas Leak Cases (2019) 7
Cal.5th 391, 395–396.

5 Defendants William C. Rusnack, William D. Jones, Lynn
Schenk, Alan L. Boeckmann, Jack T. Taylor, James C. Yardley,
Kathleen L. Brown, Pablo A. Ferrero, Debra L. Reed, William G.
Ouchi, James G. Brocksmith, Jr., and William P. Rutledge were
members of the Board at the time of the Aliso gas leak (Director
defendants). Defendants Dennis V. Arriola, J. Bret Lane, Joseph
A. Householder, Steven D. Davis, Martha B. Wyrsch, and Jesse J.

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SoCalGas at the time of the Aliso gas leak. When plaintiffs filed
the operative amended complaint, eight of the 15 Board members
had also been Board members at the time of the leak.6
The Aliso Canyon facility was “the largest natural gas
storage reservoir in California[,] . . . one of the largest reservoirs
in the United States,” and the largest of Sempra’s four
underground natural gas storage facilities. The Aliso gas leak
occurred in the gas storage well designated SS-25 (Well). The
Board had actual knowledge of the substantial environmental,
public health, and economic risks posed by the Aliso Canyon
facility and the Well.
In 2000, the Board implemented a Board-level committee
named the Environmental, Health, Safety, and Technology
Committee (Committee). The responsibilities of the Committee
“included monitoring safety issues, including storage well safety
. . . .” Pursuant to its charter, the Committee “[was] responsible
for reviewing ‘environmental, health and safety laws, regulations
and developments at the global, national, regional and local level
and evaluation of ways to address these matters as part of
Sempra’s business strategy and operations.’” Further, the
Committee’s “focus on environmental, health, safety and
technology issues [was] consistent with the [B]oard’s oversight
role of corporate responsibility and stewardship.”

Knight, Jr. were either officers of Sempra or SoCalGas, or
directors of SoCalGas, at the time the Aliso gas leak occurred.

6 The eight Board members remaining from the time of the
Aliso gas leak were Rusnack, Jones, Schenk, Boeckmann, Taylor,
Yardley, Brown, and Ferrero.

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 Between January 2013 and October 2015, the Committee
met 10 times and regularly reported to the Board.
On June 17, 2013, the Committee members discussed
among themselves “‘SoCalGas’[s] environmental and safety
compliance management program,’” as well as a gas discharge
incident at the Playa del Rey gas storage facility. The members
also discussed “SoCalGas’[s] emergency response structure,
training program, communication processes[,] . . . drills and
simulations used to replicate emergency scenarios and reviewed
lessons learned.”
The Board received “periodic presentations from
management and attempted to inform itself regarding risks to
[Sempra] posed by potential problems with the pipelines.”
And, on May 9, 2014, at a Board meeting, the Board members
discussed SoCalGas’s “‘state of the art’” natural gas pipeline
safety enhancement program.
In June 2014, an executive attended the Board meeting and
advised the Board about several factors to be included in
SoCalGas’s general rate case presentation to the California
Public Utilities Commission (CPUC), including “cybersecurity
protections, enterprise risk management, physical security and
improved service, safety and reliability.” At the meeting, “[t]he
Board asked questions of management, all of which were
answered to its satisfaction.” The Board then expressed that
SoCalGas should proceed with filing a notice of intent for the
general rate case presentation with the CPUC.
As part of the general rate case presentation submitted in
November 2014, SoCalGas sought a rate increase for a proposed
“Storage Integrity Management Program” (SIMP) which was to
be implemented in 2015. SoCalGas’s executives had identified

6
significant deterioration of the underground storage wells at the
Aliso Canyon and three other facilities. The SIMP proposed that
all of SoCalGas’s active gas injection wells, including the Well, be
tested immediately in order to avoid unsafe conditions or an
uncontrolled failure. The SIMP anticipated that following an
inspection, additional repairs would be recommended.
On December 9, 2014, the Board received its annual risk-
management report, which discussed, among other things, “‘gas
infrastructure safety and reliability risks.’”
In May 2015, a SoCalGas executive updated the Board on
the general rate case and “outlined SoCalGas’s focus on safety,
reliability, customer service and the estimated timeframe for the
rate case proceeding.”
In September 2015, the Board received other general rate
case updates from SoCalGas executives who described “the major
cost drivers for the increases being requested by SoCalGas,
including costs associated with maintaining and improving
infrastructure and safety-related and compliance programs.”
“The Board asked questions” of the SoCalGas executives, “all of
which were answered to the Board’s satisfaction.”
The combined total of meetings held by either the Board or
the Committee between 2013 and 2015 was approximately 90.
On October 23, 2015, SoCalGas employees discovered the
Aliso gas leak during a twice-daily observation of the Well. On
October 26, 2015, SoCalGas reported the leak to several
government agencies, including the California Emergency
Management Agency. The gas leak continued until
February 18, 2016. In a quarterly financial form submitted to
the Securities and Exchange Commission on November 11, 2019,

7
Sempra disclosed that it had suffered at least $1.1 billion in
damages as a result of the leak.

B. Procedural Background

Beginning in February 2016, plaintiffs filed individual
shareholder derivative actions against defendants for breach of
fiduciary duty.
On August 10, 2017, plaintiffs filed a consolidated
shareholder derivative complaint, alleging that defendants
breached their fiduciary duties “by failing to take steps to
maintain an adequate inspection program, documentation,
monitoring, and risk management plan to ensure safety at [the]
Aliso Canyon [facility], including [the Well].” Plaintiffs also
alleged that defendants aided and abetted the breach of fiduciary
duty. Plaintiffs did not serve a demand on the Board prior to
filing suit and instead alleged that it would be futile to do so.
Defendants demurred, and, on November 4, 2019, the trial
court sustained the demurrer with leave to amend, finding that
plaintiffs failed sufficiently to allege that serving a demand on
the Board would have been futile.
On February 5, 2020, plaintiffs filed the operative first
amended complaint. In support of the breach of fiduciary duty
cause of action, plaintiffs alleged that defendants failed to be
informed of “serious safety issues at Aliso Canyon” and “either
knew, were reckless, or were grossly negligent in not knowing or
acting upon the matters alleged . . . .” According to plaintiffs,
“[d]efendants completely abdicated their duty to receive
information from management and regular reporting to ensure
safety at [the] Aliso Canyon [facility], including [the Well] in the

8
years leading up to the leak.” Plaintiffs also alleged defendants’
“reckless approach to natural gas well safety, and their
intentional decision to not adopt and implement a modern,
effective and comprehensive risk assessment program for
[Sempra’s] natural gas wells, despite knowledge of increasing
actual physical integrity problems at the wells, constitutes bad
faith and disloyal conduct . . . .” Defendants again demurred.
On December 30, 2020, the trial court issued its ruling
sustaining the demurrers, concluding that plaintiffs again failed
sufficiently to allege demand futility. The court found instructive
In re Caremark International Inc. (Del. Ch. 1996) 698 A.2d 959
(Caremark) and Marchand v. Barnhill (Del. 2019) 212 A.3d 805
(Marchand), Delaware cases involving claims that directors failed
to exercise oversight. According to the court, plaintiffs had failed
to state demand futility under Marchand, which required them to
plead facts demonstrating “an utter failure by [d]efendants to
attempt to assure a reasonable information and reporting system
exists.” At a subsequent hearing, plaintiffs indicated they would
not seek leave to amend. On February 4, 2021, the court issued
the judgment of dismissal from which plaintiffs timely appealed.

III. DISCUSSION

A. Standard of Review

We review the trial court’s sustaining of a demurrer de
novo. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “In reviewing
the sufficiency of a complaint against a general demurrer, we are
guided by long-settled rules. ‘We treat the demurrer as
admitting all material facts properly pleaded, but not

9
contentions, deductions or conclusions of fact or law. [Citation.]
We also consider matters which may be judicially noticed.’
[Citation.] Further, we give the complaint a reasonable
interpretation, reading it as a whole and its parts in their
context. [Citation.]” (Ibid.)7
“[In ruling on a demurrer, a] court generally confines itself
to the pleading but, as appropriate, may extend its consideration
to matters subject to judicial notice. [Citation.] ‘[W]hen the
allegations of the complaint contradict or are inconsistent with
such facts, we accept the latter and reject the former.
[Citations.]’ [Citation.] We give the same precedence to facts
evident from exhibits attached to the pleading. [Citations.]
Efforts to show reasoning errors are beside the point. ‘“Our only
task in reviewing a ruling on a demurrer is to determine whether
the complaint states a cause of action.”’ [Citations.] We do that
independently [citation], regardless of reasons stated by the trial
court. [Citation.]” (Hill v. Roll Internat. Corp. (2011) 195
Cal.App.4th 1295, 1300 (Hill).)8

7 Plaintiffs do not argue there is a reasonable possibility that
any defects can be cured by amendment.

8 In ruling on the demurrer, the trial court took judicial
notice of certain Board and Committee minutes, a ruling
plaintiffs do not challenge on appeal. Plaintiffs contend,
however, that the court did not just take judicial notice of the
minutes but assumed the truth of the matters asserted therein.
As plaintiffs’ contention, at bottom, is a challenge to the court’s
reasoning, we need not address it. (Hill, supra, 195 Cal.App.4th
at p. 1300.) In any event, because we conduct an independent
review of the court’s order, we do not rely on the court’s
interpretation of the minutes.

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B. Shareholders’ Derivative Actions and Demand Futility

“It is a fundamental principle of corporate governance that
the role of managing the business of the corporation is vested in
its board of directors, not in its shareholders. (Grosset v. Wenaas
(2008) 42 Cal.4th 1100, 1108.) This responsibility includes the
prosecution, defense, and control of corporate litigation. (Ibid.)
Judicial deference is accorded to directors under the ‘business
judgment rule,’ which recognizes that where decisions are
without fraud or breach of trust, ‘management of the corporation
is best left to those to whom it has been entrusted, not to the
courts. [Citation.]’ (Desaigoudar v. Meyercord (2003) 108
Cal.App.4th 173, 183.) As codified in section 309, the business
judgment rule obligates a director to perform his or her duties ‘in
good faith, in a manner such director believes to be in the best
interests of the corporation and its shareholders and with such
care, including reasonable inquiry, as an ordinarily prudent
person in a like position would use under similar circumstances’
(§ 309, subd. (a)); and it insulates a director from liability when
he or she performs those obligations in the manner provided in
the statute (§ 309, subd. (c)).” (Bader v. Anderson (2009) 179
Cal.App.4th 775, 787–788, fn. omitted (Bader).)
“This principle that the corporation must bring suit on its
own behalf notwithstanding, where the directors fail or refuse to
act, a shareholder has a sufficient interest in the entity ‘to justify
the bringing of a “propulsive” action, designed to set in motion
the judicial machinery for the redress of the wrong to the
corporation. [Citations.]’ (Klopstock v. Superior Court (1941) 17
Cal.2d 13, 16–17 . . . .) ‘[T]he corporation is the ultimate
beneficiary of such a derivative suit . . . .’ (Id. at p. 21.) A

11
derivative lawsuit is in essence a consolidation in equity of two
suits, one by the shareholder against the directors seeking an
order that they sue those who have wronged the corporation, and
the other by the corporation against the wrongdoers. (Daily
Income Fund, Inc. v. Fox (1984) 464 U.S. 523, 529, fn. 4.) A
presuit demand on the directors, however, is ordinarily required
for the bringing of a derivative action.” (Bader, supra, 179
Cal.App.4th at pp. 788–789.)
“This requirement that a shareholder establish that he or
she made a ‘“suitable demand, unless excused by extraordinary
conditions . . .” [citation]’ (Kamen v. Kemper Financial Services,
Inc. (1991) 500 U.S. 90, 96 (Kamen)), ‘“is to encourage
intracorporate resolution of disputes and to protect the
managerial freedom of those to whom the responsibility of
running the business is delegated . . . .”’ (Shields v. Singleton
(1993) 15 Cal.App.4th 1611, 1619 (Shields).) The demand
requirement is also intended to prevent the abuse of the
derivative suit remedy. (Kamen, [supra, 500 U.S.] at pp. 95–96.)
. . . California’s demand requirement under section
800[, subdivision ](b)(2) is similar to the federal rule and requires
that the plaintiff in a shareholder derivative suit ‘allege[] in the
complaint with particularity plaintiff’s efforts to secure from the
board such action as plaintiff desires, or the reasons for not
making such effort, and allege[] further that plaintiff has either
informed the corporation or the board in writing of the ultimate
facts of each cause of action against each defendant or delivered
to the corporation or the board a true copy of the complaint which
plaintiff proposes to file.’” (Bader, supra, 179 Cal.App.4th at
pp. 789–790.)

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 “‘Although “jurisdictions differ widely in defining the
circumstances under which demand on directors will be excused,”
[citation], demand typically is deemed futile when a majority of
the directors have participated in or approved the alleged
wrongdoing, [citation], or are otherwise financially interested in
the challenged transactions, [citation].’ (Kamen, supra, 500 U.S.
at pp. 101–102, fn. omitted.) . . . [G]iven the requirement under
section 800[, subdivision ](b)(2) that allegations be made ‘with
particularity,’ it is clear that general averments that the directors
were involved in a conspiracy or aided and abetted the wrongful
acts complained of will not suffice to show demand futility.
(Shields, supra, 15 Cal.App.4th at p. 1621.) Likewise, a general
claim that there is nationwide structural bias common to
corporate boards will not excuse the making of a demand before
bringing a derivative suit. (Oakland Raiders v. National Football
League (2001) 93 Cal.App.4th 572, 587 [(Oakland Raiders)].)
Rather, ‘the court must be apprised of facts specific to each
director from which it can conclude that that particular director
could or could not be expected to fairly evaluate the claims of the
shareholder plaintiff.’ (Shields, [supra, 15 Cal.App.4th] at
p. 1622.) Thus, the court, in reviewing the allegations to support
demand futility, must be able to determine on a director-by-
director basis whether or not each possesses independence or
disinterest such that he or she may fairly evaluate the challenged
transaction. (Oakland Raiders[, supra, 93 Cal.App.4th] at
p. 587.)” (Bader, supra, 179 Cal.App.4th at p. 790.)
“California courts commonly look to two tests enunciated by
the Delaware Supreme Court for determining the adequacy of the
pleading of demand futility. Where a decision of the board of
directors is challenged in the derivative suit, the Aronson test

13
asks ‘whether, under the particularized facts alleged, a
reasonable doubt is created that: (1) the directors are
disinterested and independent [or] (2) the challenged transaction
was otherwise the product of a valid exercise of business
judgment.’ (Aronson v. Lewis (Del. 1984) 473 A.2d 805, 814
(Aronson); accord Bader, supra, 179 Cal.App.4th at p. 791;
Oakland Raiders[, supra,] 93 Cal.App.4th [at p.] 587 . . .) But
where ‘the board that would be considering the demand did not
make a business decision which is being challenged in the
derivative suit’ (Rales v. Blasband (Del. 1993) 634 A.2d 927, 933–
934 (Rales)), the Rales test asks whether ‘the particularized
factual allegations of a derivative stockholder complaint create a
reasonable doubt that, as of the time the complaint is filed, the
board of directors could have properly exercised its independent
and disinterested business judgment in responding to a demand.
If the derivative plaintiff satisfies this burden, then demand will
be excused as futile’ (Rales, supra, [634 A.2d] at p. 934; accord
Bader, supra, [179 Cal.App.4th] at pp. 791–792 [summarizing
Rales]).” (Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222,
233, fn. omitted (Apple).)9 Here, the parties agree that the Rales
test applies to plaintiffs’ allegation of demand futility.

9 Aronson was overruled on another point not relevant here.
(Brehm v. Eisner (Del. 2000) 746 A.2d 244, 254–255.)
The Delaware Supreme Court recently combined the Rales
and Aronson tests. (United Food & Commercial Workers Union v.
Zuckerberg (Del. 2021) 262 A.3d 1038, 1058; see Tola v. Bryant
(2022) 76 Cal.App.5th 746, 752.)

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C. Substantial Likelihood of Liability

1. Applicability of Caremark Standard in California

Under the Rales test, “[d]irectorial interest . . . exists where
a corporate decision will have a materially detrimental impact on
a director, but not on the corporation and the stockholders. In
such circumstances, a director cannot be expected to exercise his
or her independent business judgment without being influenced
by the adverse personal consequences resulting from the
decision.” (Rales, supra, 634 A.2d at p. 936.)10 Directors are not
impartial or disinterested if they face a “‘“substantial likelihood”’”
of personal liability. (See Apple, supra, 18 Cal.App.5th at p. 256;
Bader, supra, 179 Cal.App.4th at p. 798; see also Rales, supra,
634 A.2d at p. 936; Aronson, supra, 473 A.2d at p. 815.)
Under Delaware law, “Caremark articulates the necessary
conditions for assessing director oversight liability.” (Stone v.
Ritter (2006) 911 A.2d 362, 365, fn. omitted (Stone).) “[T]he
stockholders must allege ‘that a director acted inconsistent with
his fiduciary duties and, most importantly, that the director knew
he was so acting.’ This is because a Caremark claim ‘is rooted in
concepts of bad faith; indeed, a showing of bad faith is a necessary
condition to director oversight liability.’ . . . Because of the
difficulties in proving bad faith director action, a Caremark claim

10 Plaintiffs do not allege that a demand would have been
futile because a director (1) received an improper benefit or (2)
lacked independence because the director was beholden to an
interested director, officer, or controlling shareholder. (See
Bader, supra, 179 Cal.App.4th at p. 792; Rales, supra, 634 A.2d
at p. 936.)

15
is ‘possibly the most difficult theory in corporation law upon
which a plaintiff might hope to win a judgment.’” (City of
Birmingham Retirement and Relief System v. Good (Del. 2017)
177 A.3d 47, 55, fns. omitted.)
Plaintiffs concede that under both California and Delaware
law, a substantial likelihood of liability is a ground for finding
that a director is partial or interested. They contend, however,
that whether directors face a substantial likelihood of liability is
“a question of substantive law,” governed by California law,
which materially differs from the law of Delaware. In their view,
the trial court therefore erred in following Caremark and its
progeny.

a. Limitations on Director Liability

According to plaintiffs, in California, unlike in Delaware,
directors have a duty of “reasonable inquiry,” as set forth in
section 309, subdivision (a). That section requires, among other
things, that a director engage in “reasonable inquiry, as an
ordinarily prudent person in a like position would use under
similar circumstances.” According to plaintiffs, the trial court
erred by relying on Delaware law and failing to apply section 309,
subdivision (a). We disagree.
Although section 309, subdivision (a) describes the general
duty of directors, it does not address the question at issue here,
that is, whether these Director defendants faced a substantial
likelihood of personal liability for their conduct. And, on this
question, California corporations may elect to limit director
liability. (§ 204.5, subd. (a).)

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 Specifically, section 204, subdivision (a)(10) provides, in
pertinent part, that articles of incorporation may set forth:
“Provisions eliminating or limiting the personal liability of a
director for monetary damages in an action brought by or in the
right of the corporation for breach of a director’s duties to the
corporation and its shareholders, as set forth in Section 309,
provided, however, that (A) such a provision may not eliminate or
limit the liability of directors (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of
law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its
shareholders or that involve the absence of good faith on the part
of the director, (iii) for any transaction from which a director
derived an improper personal benefit, (iv) for acts or omissions
that show a reckless disregard for the director’s duty to the
corporation or its shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary
course of performing a director’s duties, of a risk of serious injury
to the corporation or its shareholders, (v) for acts or omissions
that constitute an unexcused pattern of inattention that amounts
to an abdication of the director’s duty to the corporation or its
shareholders . . . .” (§ 204, subd. (a)(10).)
Here, Sempra’s articles of incorporation provide: “The
liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent under California law.”
Sempra therefore adopted the limiting provisions for director
liability set forth at section 204, subdivision (a)(10). (§ 204.5,
subd. (a).)
Plaintiffs do not allege that defendants engaged in
intentional misconduct or knowing violations of the law. Nor do

17
they allege that defendants derived an improper benefit from a
transaction. Instead, plaintiffs allege that defendants engaged in
acts or omissions that: show a reckless disregard of a director’s
duties to the corporation or shareholders (§ 204, subd. (a)(10)(iv))
and constitute an unexcused pattern of inattention that amounts
to an abdication of duty (§ 204, subd. (a)(10)(v)). “Where, as here,
there is no published California decision that addresses the
precise issue before us, out-of-state decisions may provide ‘useful
guidance.’” (Jackson v. Superior Court (2018) 25 Cal.App.5th
515, 532, fn. 11.) California courts have routinely relied “on
corporate law developed in the State of Delaware given that it is
identical to California corporate law for all practical purposes.”
(Oakland Raiders, supra, 93 Cal.App.4th at p. 586, fn. 5; accord,
Apple, supra, 18 Cal.App.5th at p. 244, fn. 9.) Thus, we next
consider whether the definitions of director liability set forth at
section 204, subdivisions (a)(10)(iv) and (a)(10)(v) are consistent
with Caremark and its progeny.

b. Reckless Disregard of Duties

The Corporations Code does not define the term “reckless
disregard.” We therefore construe that term in accordance with
its ordinary legal meaning. (Civ. Code, § 13; Brown v. Superior
Court (2016) 63 Cal.4th 335, 351 [“It is a venerable principle that
when a word or phrase appearing in a statute ‘has a well-
established legal meaning, it will be given that meaning in
construing the statute’”].) “Reckless disregard” is a “[c]onscious
indifference to the consequences of an act” or “[t]he intentional
commission of a harmful act or failure to do a required act when
the actor knows or has reason to know of facts that would lead a

18
reasonable person to realize that the actor’s conduct both creates
an unreasonable risk of harm to someone and involves a high
degree of probability that substantial harm will result.” (Black’s
Law Dict. (11th ed. 2019).)
Applying this definition, we conclude that a director acts
with “reckless disregard” of his duties, within the meaning of
section 204, subdivision (a)(10)(iv) when the director (1) does an
intentional act or intentionally fails to act in accordance with
those duties, (2) with knowledge, or with reason to have
knowledge, that (3) the director’s conduct creates a substantial
risk of serious harm to the corporation or its shareholders.
Similarly, in Delaware, an “intentional dereliction of duty,
a conscious disregard for one’s responsibilities” is akin to “acts or
omissions not in good faith” (Brehm v. Eisner (In re Walt Disney
Co. Derivative Litigation) (Del. 2006) 906 A.2d 27, 65–66 (Walt
Disney)), and therefore Caremark is consistent with section 204,
subdivision (a)(10)(iv). Contrary to plaintiffs’ contention,
supported by their citation to an unpublished Court of Chancery
opinion (McElrath v. Kalanick (Del. Ch. Apr. 1, 2019) 2019 Del.
Ch. LEXIS 107, *28), Delaware case authority does not exclude
from liability a director’s reckless disregard of his or her duties.
(See Walt Disney, supra, 906 A.2d at p. 67, fn. 111 [transaction
that results from a director’s “‘reckless indifference to or a
deliberate disregard of the interests of the whole body of
stockholders’” requires further judicial scrutiny for bad faith
conduct].)

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 c. Unexcused Inattention Amounting to
Abdication of Duty

We next consider the meaning of the term “abdication of
duty” as set forth in section 204, subdivision (a)(10)(v). Again,
the Corporations Code provides no definition.11 Thus, we again
apply the plain and ordinary meaning of the word. (Civ. Code,
§ 13.) “Abdication” is “[t]he act of renouncing or abandoning
privileges or duties.” (Black’s Law Dict. (11th ed. 2019).) The act
of renouncing or abandoning one’s duties requires an intentional
decision because, in order to renounce or abandon it, one must be
aware of the duty owed in the first instance. (See Del Giorgio v.
Powers (1938) 27 Cal.App.2d 668, 680 [“there can be no
abandonment without an intention to abandon”].)
Delaware deems “the intention[al] fail[ure] to act in the
face of a known duty to act” as “describ[ing], and [being] fully
consistent with, the lack of good faith conduct that the Caremark
court held was a ‘necessary condition’ for director oversight

11 Plaintiffs cite Gaillard v. Natomas Co. (1989) 208
Cal.App.3d 1250 (Gaillard), to argue that a director’s abdication
of duties is a violation of the business judgment rule and the
reasonable inquiry duty under section 309. The Court of Appeal
held, “Notwithstanding the deference to a director’s business
judgment, the rule does not immunize a director from liability in
the case of his or her abdication of corporate responsibilities . . . .”
(Gaillard, supra, 208 Cal.App.3d at p. 1263.) Plaintiffs’ assertion
is correct that a director’s abdication of corporate duty violates
section 309. Gaillard, however, does not discuss the meaning of
“abdication of duty” in the context of section 204, subdivision
(a)(10)(v), and thus does not assist in interpreting the term. (B.B.
v. County of Los Angeles (2020) 10 Cal.5th 1, 11 [“‘“cases are not
authority for propositions not considered”’”].)

20
liability, i.e., ‘a sustained or systematic failure of the board to
exercise oversight—such as an utter failure to attempt to assure
a reasonable information and reporting system exists . . . .’”
(Stone, supra, 911 A.2d at p. 369, fn. omitted.) An “intention[al]
fail[ure] to act in the face of a known duty to act” expresses the
same concept as an “unexcused pattern of inattention that
amounts to an abdication of the director’s duty.” Accordingly, the
Caremark standard is consistent with section 204, subdivision
(a)(10)(v).

2. Application of Caremark

Having found that Delaware corporation law provides
useful guidance to the issues presented here, we now address
plaintiffs’ alternative argument that they have alleged a
substantial likelihood of liability under Caremark against the
Director defendants.
“Bad faith is established, under Caremark, when ‘the
directors [completely] fail[] to implement any reporting or
information system or controls[,] or . . . having implemented such
a system or controls, consciously fail[] to monitor or oversee its
operations thus disabling themselves from being informed of
risks or problems requiring their attention.’ In short, to satisfy
their duty of loyalty, directors must make a good faith effort to
implement an oversight system and then monitor it.”
(Marchand, supra, 212 A.3d at p. 821, fn. omitted.)
Plaintiffs contend that they have alleged conduct similar to
that at issue in Marchand, supra, 212 A.3d 805. In Marchand,
nominal defendant Blue Bell produced one product, ice cream.
(Id. at p. 809.) Over a five-year period, federal and state

21
regulators cited several of Blue Bell’s factories for food safety
violations. (Id. at pp. 811–812.) And, over a two-year period, the
company’s own inspectors and regulators found listeria in
multiple factories across several states. (Id. at pp. 813–815.)
Blue Bell’s ice cream eventually became contaminated with
listeria, resulting in a complete recall and the initiation of a
federal investigation. (Id. at pp. 814–815.)
After reviewing Blue Bell’s books and records, the plaintiff,
a Blue Bell stockholder, sued the company’s board for failing,
under Caremark, to implement any reporting system and failing
to be informed about Blue Bell’s food safety compliance.
(Marchand, supra, 212 A.3d at pp. 815–816.) The Court of
Chancery granted Blue Bell’s motion to dismiss. (Id. at p. 816.)
The Delaware Supreme Court reversed, finding the plaintiff had
alleged bad faith conduct by the board: “no board committee that
addressed food safety existed”; “no regular process or protocols
that required management to keep the board apprised of food
safety compliance practices, risks, or reports existed”; “no
schedule for the board to consider on a regular basis, such as
quarterly or biannually, any key food safety risks existed”;
“during a key period leading up to the deaths of three customers,
management received reports that contained what could be
considered red, or at least yellow, flags, and the board minutes of
the relevant period revealed no evidence that these were
disclosed to the board”; “the board was given certain favorable
information about food safety by management, but was not given
important reports that presented a much different picture”; and
“the board meetings are devoid of any suggestion that there was
any regular discussion of food safety issues.” (Id. at p. 822.)

22
 Here, the judicially-noticed Board minutes demonstrate the
existence of some oversight by the Board over SoCalGas’s gas
storage infrastructure. For example, the December 2014 Board
minutes reflect that the Board received an annual risk
management report regarding, among other things, “‘gas
infrastructure safety and reliability risks.’” Additionally, in 2000,
Sempra formed the Committee, which was obligated to monitor
well safety and conducted 10 meetings from January 2013 to
October 2015. The Committee also reported to the Board on a
gas discharge at the Playa del Rey storage facility.
Plaintiffs, however, assert that the Board minutes failed to
demonstrate that defendants discussed gas storage
infrastructure, as compared to pipeline infrastructure, and argue
that all reasonable inferences should be construed in their favor.
Plaintiffs also dispute whether the Board was aware of the
purpose of the general rate case presentation and the SIMP. At
bottom, plaintiffs’ allegations challenge the efficacy of the
monitoring system in place and “general averments that the
directors were involved . . . in a conspiracy or aided and abetted
the wrongful acts complained of will not suffice to show demand
futility.” (Bader, supra, 179 Cal.App.4th at p. 790.) Such
allegations do not constitute particularized facts that create a
reasonable doubt as to whether the Director defendants here face
a substantial likelihood of liability for, in this case, intentionally
abandoning or abdicating their duties to monitor. “[O]ur focus
here is on the key issue of whether [plaintiffs have] pled facts
from which we can infer that [the] board made no effort to put in
place a board-level compliance system. That is, we are not
examining the effectiveness of a board-level compliance and
reporting system after the fact. Rather, we are focusing on

23
whether the complaint pleads facts supporting a reasonable
inference that the board did not undertake good faith efforts to
put a board-level system of monitoring and reporting in place.”
(Marchand, supra, 212 A.3d at p. 821.)
As alleged, and contrary to plaintiffs’ allegations that there
was no reporting mechanism in place for safety issues regarding
gas storage, the Board formed the Committee, which provided
regular reports to the Board, and whose purpose included, among
other things, monitoring SoCalGas’s storage infrastructure for
safety. Additionally, the Board received annual risk
management reports. The Board also approved SoCalGas’s
notice of intent to file a general rate case and received updates
regarding it. And, the general rate case presentation included a
rate increase for the SIMP in order to investigate potential well
integrity issues. In short, plaintiffs have not alleged
particularized facts supporting their Caremark theory of liability,
and thus have failed to plead demand futility as required under
section 800, subdivision (b)(2).

D. The Fazio Action

Plaintiffs also assert an alternative theory of demand
futility, arguing that the Board’s response to a demand made by a
shareholder prior to filing an individual derivative action against
the Board (the Fazio action) demonstrates that any demand that
they would have made on the Board would have been met with a
similar response and would therefore have been futile. We
disagree.

24
 1. Background

On April 13, 2016, Charles Fazio, another Sempra
shareholder, submitted a demand that the Board pursue claims
against certain directors and officers for alleged breaches of
fiduciary duty based on their conduct prior to and during the
Aliso gas leak. On June 24, 2016, the Board created a demand
review committee to investigate and make recommendations
about what, if any, actions to take in response.
On March 1, 2017, Fazio filed a shareholder derivative
action against the Board.
On November 4, 2019, the trial court sustained defendants’
demurrer to the Fazio action with leave to amend. The court
concluded that Fazio failed to allege facts showing his demand
had been refused because the Board needed more time to analyze
the demand due, in part, to the complexity of the litigation
pending against Sempra and SoCalGas.
On June 23, 2022, while this appeal was pending, Fazio
filed an amended complaint alleging that he had received a
demand refusal from the demand review committee. On
November 30, 2022, the trial court sustained Sempra’s demurrer
to Fazio’s amended complaint without leave to amend.12

2. Analysis

Plaintiffs contend that they sufficiently alleged demand
futility because the Board, by failing to act on Fazio’s demand,

12 We judicially notice Fazio’s amended complaint and the
trial court’s order sustaining Sempra’s demurrer. (Evid. Code,
§ 452, subd. (d).)

25
demonstrated that any similar demand made by plaintiffs would
have been futile.
As noted, while this appeal was pending, the Board acted
on Fazio’s demand and refused it. Thus, plaintiffs’ contention
that the Board failed to act on Fazio’s demand is now moot.
(Association of Irritated Residents v. Department of Conservation
(2017) 11 Cal.App.5th 1202, 1221–1222.) Moreover, the Board’s
eventual refusal of the Fazio demand does not, by itself,
demonstrate that any demand would have been futile. At best,
the eventual refusal of Fazio’s demand made it more probable
that the Board would have also refused plaintiffs’ demand. But it
does not demonstrate that it would have been futile for plaintiffs
to make such a demand. (Rales, supra, 634 A.2d at pp. 933–934.)
Accordingly, the cases cited in plaintiffs’ brief that address when
a complaint sufficiently alleges that a plaintiff has filed a
demand that a board of directors has refused (see Rich ex rel.
Fuqi Int’l, Inc. v. Yu Kwai Chong (Del. Ch. 2013) 66 A.3d 963,
977; Thorpe v. CERBCO, Inc. (Del. Ch. 1991) 611 A.2d 5, 11) are
inapposite. And, for the reasons we discuss above, plaintiffs’
allegations do not otherwise sufficiently allege a substantial
likelihood of director liability.

26
 IV. DISPOSITION

The judgment of dismissal is affirmed. Defendants are
entitled to costs on appeal.

CERTIFIED FOR PUBLICATION

KIM, J.

I concur:

MOOR, J.

27
 Kanter et al. v. Reed et al. – B312129

RUBIN, P. J. – Dissenting:

I respectfully dissent.
The majority agrees that, at the time the plaintiffs filed the
operative complaint, eight of the fifteen board members – a
majority – had been on the Board at the time of the gas leak.
(Maj. Opn. at p. 5 & fn. 6.) The issue presented by this appeal,
simply, is whether plaintiffs have alleged facts sufficient to raise
a reasonable doubt that the Board could have properly exercised
its independent and disinterested business judgment in
responding to a demand that it authorize a corporate suit
against, among others, a majority of its current members. (Rales
v. Blasband (Del. 1993) 634 A.2d 927, 934.) This, in turn,
depends on whether the majority of board members, who had
been on the board at the time of the leak, face a substantial
likelihood of personal liability in the action. (Id. at p. 936.)
In this way, the “futility” requirement turns into an
evaluation of the merits of the action. If the action has merit, the
individual defendants face a substantial likelihood of personal
liability, and the futility requirement is satisfied. That brings me
to In re Caremark International (Del. Ch. 1996) 698 A.2d 959,
969–970 (Caremark), which acknowledged a cause of action for
director liability for failure to be reasonably informed concerning
the corporation; and Marchand v. Barnhill (Del. 2019) 212 A.3d
805 (Marchand), which explained the standard for a Caremark
claim.
The majority agrees that the Marchand test applies: “Bad
faith is established, under Caremark, when ‘the directors
[completely] fail[ ] to implement any reporting or information
system or controls[,] or . . . having implemented such a system or
controls, consciously fail[ ] to monitor or oversee its operations
thus disabling themselves from being informed of risks or
problems requiring their attention.’ In short, to satisfy their duty
of loyalty, directors must make a good faith effort to implement
an oversight system and then monitor it.” (Marchand, supra,
212 A.3d at p. 821, fn. omitted.)
Bearing in mind that the case is only at the pleading stage,
I believe we need consider only the first alternative – complete
failure to implement any reporting or information system or
controls. In their operative complaint, plaintiffs repeatedly allege
that the Board members “completely failed to adopt and
implement a board-level reporting system with respect to the
company’s underground storage wells.” Although somewhat
conclusory, the complaint goes on to flesh out the details. For
example, plaintiffs allege that SoCalGas Storage Engineering
Manager James Mansdorfer repeatedly warned management
regarding safety concerns, but “[t]here was no mechanism for
reporting [his] safety concerns and remediation recommendations
to the Board.” Plaintiffs further allege that, in 2013, leaks were
discovered in two wells at Aliso Canyon. Although individuals at
SoCalGas were concerned that capital well work repairs were
behind schedule, resulting in multiple wells with “ ‘some type of
well integrity issue,’ ” there is no indication that any of the Board
directors “learned about, discussed, or inquired about, those two
2013 leaks or the maintenance issues and safety work backlog
raised by management and a senior storage engineer. There is
no indication that those Director Defendants had any system or
reporting mechanism for learning about these two leaks or the

2
safety concerns of senior knowledgeable corporate personnel . . . .”
Plaintiffs allege that, as to above-ground gas transmission
pipelines, the Board received periodic presentations from
management regarding risks; but, when it came to underground
storage wells, “the Board received no reports, failed to inform
itself about the risks posed by the wells, and failed to discuss any
germane matters regarding gas storage at Board meetings.”
According to plaintiffs, Board and Committee minutes
revealed “that the Board and the [Committee] periodically
discussed safety issues relating to pipeline safety (as opposed to
well safety).” There was only one mention of gas storage wells –
following a discharge at the Playa del Rey SoCalGas storage
facility. This, according to plaintiffs, reflects “the failure to adopt
or implement any Board-level reporting process regarding the
significant risks posed by the Company’s underground storage
wells . . . .”
Defendants’ demurrer argued that the Board did, in fact,
discuss safety of gas storage practices, relying on (1) an excerpt
from December 8-9, 2014 Board minutes reflecting a discussion of
“ ‘gas infrastructure safety and reliability risks’ ” in the context of
Sempra’s “ ‘overall risk management philosophy’ ”; (2) June 17,
2013 minutes of the Committee meeting which discussed
“ ‘emergency response practices’ ” following the “gas storage
incident” at Playa del Rey; and (3) the operative complaint’s
reference to the Board’s awareness of a May 2, 2014 Aliso Canyon
Safety Plan.
As to the first, the December 8-9, 2014 Board meeting
minutes show the relevant discussion under the heading,
“Annual Risk Management Report.” Kathryn Collier, identified
only as a representative of Sempra, “described various risks

3
facing [Sempra] including regulatory environment and political
risks, gas infrastructure safety and reliability risks, electric
infrastructure safety and reliability risks, cybersecurity,
infrastructure project execution and employee/customer safety
and workplace violence. She discussed the nature of these risks
and the ways [Sempra] mitigates such risks.” There is no
indication that this brief mention of “gas infrastructure safety”
specifically addressed SoCalGas’s underground well storage, or
that the Board expected Sempra’s “Annual Risk Management
Report” to do so.
As to the second, the June 17, 2013 Committee meeting
minutes reflect the relevant discussion under the heading of
“Environmental, Worker Safety, Pipeline Integrity and
Emergency Response Programs,” and the subheading
“SoCalGas.” As part of its report, SoCalGas discussed its
“environmental and safety compliance management program,”
with specific mention of “certain occurrences during the prior
year, including a gas discharge incident at SoCalGas’s Playa del
Rey storage facility, and discussed corrective actions taken by
management in response to those occurrences.” In addition,
SoCalGas reported on its “gas system safety and pipeline
integrity management program and its pipeline safety plan.
[SoCalGas] noted that the safety plan included more than ten
individual plans and discussed safety values and principles that
are incorporated into each plan. The report included assessments
of how technology is being used to create additional safeguards.”
While these minutes specifically mention the gas discharge at
Playa del Rey, safety plans in general and pipeline integrity in
particular, they make no specific mention of gas well storage
integrity, and therefore do not establish that the Board, through

4
the Committee, had a reporting system by which it was aware of
the safety risks presented by SoCalGas’s gas storage wells.
As to the third, plaintiffs’ complaint alleged that the May
2014 Aliso Canyon Safety Plan “did not call for the involvement
of any senior Company executives in the safety plan, and instead
ensconced an electrical engineer as the lead member of the Aliso
Canyon Safety Committee. The main purpose of the safety plan
seems to have been to ‘meet the needs of the high fire dangers
and unique conditions of Aliso Canyon’ and thus primarily
addresses fire hazards at Aliso Canyon. The safety plan, while
lengthy, mostly encouraged employees to pay lip service to safety
by always ‘dress[ing] appropriately for work [and] perform[ing]
the circle of safety.’ The safety plan, while well-intentioned, did
absolutely nothing to address the infrastructure problems and
lack of functioning safety valves and other problems at Aliso
Canyon. Further, while the safety plan purports to incorporate
storage policies and procedures, these referenced policies either
did not address the infrastructure problems at Aliso Canyon or
were not monitored or implemented to ensure safety at Aliso
Canyon.” Plaintiffs allege this was nothing more than a “feel
good” safety plan intended to provide only “an appearance of
safety preparation.” This, too, fails to establish a Board-level
reporting plan regarding the safety risks of underground gas
storage wells.1

1 Defendants also rely on proceedings before the CPUC
wherein SoCalGas sought a rate hike to address the safety risks
posed by the storage wells at Aliso Canyon. But plaintiffs allege
that defendants did not review the testimony of SoCalGas prior
to its submission to the CPUC, and the Board did not make itself
aware of the specific safety risks encompassed in SoCalGas’s
request for a rate hike. Knowing broadly that SoCalGas sought a

5
 In short, plaintiffs’ complaint paints a picture of a Board
that had its head in the sand about the danger of SoCalGas’s
wells in the ground. Individuals who were aware of the dangers
were repeatedly sounding the alarm bell, but there was no means
for the Board to hear it. In response to these allegations, the
Board combed through the minutes of its own meetings and those
of the Committee, only to find references to infrastructure safety
that are, at best, ambiguous as to whether they encompassed
underground storage wells.
The majority sees this as an irrelevant difference of degree
– concluding that the Board had “some” oversight over gas
storage infrastructure, which it holds is sufficient under
Marchand. (Maj. Opn., pp. 22–23.) I do not share that view. A
brief mention of “gas infrastructure safety” in the course of
overall risk management; a discussion of remedies taken after a
gas discharge at another facility and a pipeline safety plan; and
Board awareness of a “feel good” Aliso Canyon plan do not add up
to proof of the existence of a system of Board oversight over aging
gas storage wells at Aliso Canyon. Marchand requires a good
faith effort to implement an oversight system; these sporadic
references do not indicate, as a matter of law, that either the
Board itself or its Committee had implemented such an oversight
apparatus.
On this record, I would conclude plaintiffs have raised a
reasonable doubt that the Board would have addressed a demand

rate hike to address safety risks is different from knowing what
those safety risks were, and even further different from having a
reporting program in place to receive timely notice about the
risks as they arose. This is particularly so because, if the risks
were critical, they should have been remediated regardless of
whether SoCalGas’s proposed rate hike was approved.

6
independently; therefore, plaintiffs’ failure to make a demand
was excused on ground of futility. For the same reasons, I would
conclude defendants’ demurrer should have been overruled on the
merits. I would therefore reverse.

RUBIN, P. J.

7